CVS Health Corporation: Improving Results, Limited Upside

CVS Health Corporation (NYSE: CVS) is a diversified health services company that operates more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, and a leading pharmacy benefits manager with around 105 million plan members.

The company serves an estimated 34 million people through traditional, voluntary, and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan.

Due to its recession-proof and necessity-type business model, CVS has managed to produce robust results through the pandemic while reporting solid profits. After years of stagnation, the company also hiked its quarterly dividend, which significantly boosted shareholders’ confidence. 

Hence, the stock has undergone a prolonged rally over the past year. In my view, while CVS has not become too expensive, most of the easy gains to be made have already taken place. Hence, I am neutral on the stock.

Improving Results

CVS’s Q3 2021 results came in rather strong, with revenues growing 10% to $73.8 billion and adjusted EPS reaching $1.97 compared to $1.66 in the comparable period last year.

Revenue growth was powered by 9.3% sales growth in CVS’s Pharmacy Services, with total pharmacy claims growing by 6.9%. Specialty Pharmacy also reported strong numbers, with sales growing 8.7%, driven by new business and brand inflation. CVS’s Retail/LTC segment’s revenues also grew by 10%, powered by strength in prescription volumes and COVID-19 vaccines.

Same-store sales in CVS’s retail segment increased 9.6%, with pharmacy sales growing 8.8%, prescription volumes growing 9%, and front store sales growing by 12.3%. The company also posted total membership growth of 1.7%, boosted by government memberships which expanded 9.5% year-over-year. 

In addition, CVS utilized its strong operating cash flows to repay $1.1 billion of net debt while the company remains on track to reach its target of 3x leverage in 2022.

With strong tailwinds boosting CVS these days, its upcoming earnings should also exhibit solid numbers. The company adjusted its FY 2021 GAAP diluted EPS guidance range to $6.13 to $6.23 from $6.35 to $6.45 previously, and raised its FY 2021 adjusted EPS guidance range to $7.90 to $8 from $7.70 to $7.80 previously.

Dividend and Valuation

CVS has never cut its dividend in 25+ years. However, DPS hikes have only occurred whenever the company reaches a new, higher profitability plateau to ensure that payouts are always well-covered. 

After paying a constant dividend since 2017, CVS announced a 10% dividend increase in December, to a quarterly rate of $0.55. This is great news as it solidifies CVS’s strong outlook in the medium term. Still, following the stock’s extended rally, CVS’s yield currently stands at just 2%, which brings us to CVS’s valuation.

Based on the midpoint of management’s adjusted EPS guidance of $7.95, CVS is currently trading at a P/E of around 12.8. This is not an over-extended multiple, but I wouldn’t expect a further valuation expansion either. CVS has historically traded based on its yield, and the current yield is not that high to attract further investor interest, in my view.

Wall Street’s Take

Turning to Wall Street, CVS has a Strong Buy consensus rating, based on 18 Buys and three Holds assigned in the past three months. At $114.10, the average CVS stock forecast implies 11.7% upside potential.

Conclusion

CVS is a reliable company with the ability to generate robust cash flows under virtually all economic environments. While the company’s results have been improving and the latest dividend hike was certainly welcome, I believe that the stock’s upside has been limited following its extended rally.

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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.